Winter is Coming!

Published on
26th September, 2018

“TRIAD! It’s illogical Captain”

The above quote, in homage to all Trekkies, refers back to an earlier blog of March last year which drew attention to the fact that the benefits payable to owners or operators of ‘embedded’ generation assets were to be reviewed. In particular, the so-called ‘TRIAD benefit’ was on the radar since, in the view of Ofgem, it distorted investment decisions as between embedded generation and transmission-connected generation (over 100 MW).

The TRIAD benefit primarily consists of the so-called Transmission Use of System (TNUoS) demand residual which is payable to embedded generators at times of highest demand on the grounds that such generation contributes to a reduction in demand (and hence transmission system costs) at each Grid Supply Point (GSP).

As far as embedded generators have been concerned, total TRIAD payments have historically been calculated as the arithmetic average of exports in each of the three periods of highest demand on the system multiplied by the tariff applicable to the zone in question. At the time of the decision to review the charging methodology, the average residual tariff payable to embedded generators was £45/kW.

In contrast, the principle behind the alternative payment method proposed was that embedded exporting generators should be paid in line with the avoided costs of GSP reinforcement – around £1.62/kW – representing a substantial potential drop in income for embedded generators.

The decision by Ofgem to review the TRIAD benefit was subsequently challenged in the High Court but the appeal was dismissed in June this year. This means that the new arrangements and methodology for setting embedded benefits, which came into effect in April this year, have remained in place and were used for National Grid’s June 2018 forecasts.

In summary, the changes to the charging methodology mean that, instead of paying or receiving the same £/kW charge, in any given TRIAD period, importers now pay a demand tariff and exporters receive an embedded export tariff. Transitional arrangements have been incorporated into the revised approach so that the drop in generators’ TRIAD-based income is managed in a phased manner over the next three winters.

The average TNUoS Demand and Embedded Export tariffs for the 2018/2019 and 2019/2020 are summarised in the table below:

TNUoS Demand and Export Tariffs (£/kW)

2018/2019 (final)

2019/2020 (forecast)

Demand Tariff

£46.17/kW

£50.75/kW

Embedded Export Tariff

£26.91/kW

£14.31/kW

As the numbers show, there is a significant and growing difference between demand tariffs and the export embedded tariffs. This means that generators, for example, who are exporters in two out of the three TRIAD periods but importers in the other period are now exposed to the risk that TRIAD payments in total are reduced to insignificant, zero or even negative levels – there will of course be differential effects depending on where the generator is located.

The general impact of the new charging arrangements is coming more clearly into focus as export tariffs continue to decline and demand tariffs increase further. With the current arrangements now in place, the incentive to maximise income by targeting export production in the three TRIAD periods is disappearing quickly, BUT the incentive to avoid consumption of power in these periods continues to grow ever larger.

In summary, while embedded generators will no longer be incentivised to “chase the TRIAD” as a revenue benefit, they will still need to monitor the TRIAD periods to avoid incurring costs by importing (due to shutdown periods). Similarly, with the forecasted increase in the demand tariff, it is more important than ever that importers are aware of potential TRIAD periods if they are able to decrease their import power levels.

EnDCo offers both producers and consumers of electricity direct and transparent access to the wholesale market and is well placed to help these participants take advantage of the remaining opportunities available via the TRIAD mechanism.